Renewable portfolio standards (RPSs) that favor in-state renewable energy projects may be unconstitutional under the Commerce Clause. That is the recent opinion of Judge Richard Posner, an influential member of the U.S. Court of Appeals for the 7th Circuit. In Ilinois Commerce Commission v. FERC, Judge Posner made his position clear regarding one such RPS: "Michigan cannot, without violating the Commerce Clause of Article I of the Constitution, discriminate against out-of-state renewable energy." The case involved a complex regulatory dispute over financing the construction of transmission lines from rural wind farms. Because the constitutionality of Michigan's RPS was not part of the dispute, Judge Posner's language about the Commerce Clause is technically non-binding dictum. Nevertheless, his challenge to the RPS is problematic for Michigan and a number of states with similar renewable energy requirements.
Michigan's RPS was brought to the court's attention by the state itself as part of its argument to escape FERC's pricing order. Michigan's RPS only allows renewable energy to satisfy its 10 percent renewable energy requirement if it was generated within the state, or within the nearby service territory of a utility that also serves Michigan. Michigan claimed it should not have to subsidize the construction of new out-of-state transmission lines connecting wind farms, as FERC had ordered Michigan to do, because its own RPS would forbid it from crediting out-of-state wind power towards its required minimum. Judge Posner quickly dismissed this argument, in the process challenging the very constitutionality of Michigan's RPS under the Commerce Clause.
Ann Carlson, a professor of environmental law at UCLA, argues that Judge Posner's language "creates new legal doubts about the constitutional validity of a number of states' renewable portfolio standards." Carlson contends that even though the language was not technically a holding, it will cloud many other states' RPSs that discriminate against out-of-state renewable projects. She assumes that many of these states will have to either amend their RPSs or face constitutional challenges down the road.
Berkeley Law professor Steven Weissman disagrees. He argues that Judge Posner made only a "throw-away assumption" instead of doing a more thorough Commerce Clause analysis. If he had looked more closely at Michigan's RPS, says Weissman, he would have taken notice of the state's rationale for discriminating against out-of-state renewable energy. Importantly, the Michigan RPS does not disfavor all out-of-state renewable energy, just most of it. But there may be compelling reasons for states to desire the renewable energy they purchase to be generated nearby, including displacement of local pollution from traditional power plants and improving local grid reliability. Because logical rationales like these exist, Weissman argues that Michigan's RPS is "not all about protectionism."
The problem is that Michigan's RPS cannot be at all about protectionism. The Supreme Court has long said that the Commerce Clause has a "dormant" element preventing states from favoring their own industry to the detriment of interstate competition. When a state has a law or policy that discriminates on its face against the goods or services of other states on the basis of geography or point-of-origin, such a law or policy is almost always in violation of the dormant Commerce Clause. According to a case cited by Judge Posner, a law or policy that discriminates in this way has to be entirely "unrelated to economic protectionism." If not, the Supreme Court almost always concludes that the state's claimed interests are after-the-fact rationalizations for a protectionist policy.
Michigan's law simply excludes renewable energy generated from almost anywhere outside the state from counting towards its RPS. This is exactly the kind of geographic discrimination the dormant Commerce Clause prohibits. Michigan would have to show that this is the best and only way to accomplish a compelling state interest. It seems that Michigan would have a difficult time justifying its RPS as currently written. Clearly in Judge Posner's opinion, Michigan's RPS is on its face a protectionist regulation designed to favor Michigan renewable projects. For this reason, Michigan's law may face what Judge Posner called "an insurmountable constitutional objection."
This criticism of Michigan's law has implications for California, the state with the most aggressive RPS in the nation. California's RPS also favors local renewable projects, but importantly does not discriminate against out-of-state renewables geographically. Instead, it affirmatively favors projects that either connect directly to the state's grid or follow fairly complex procedures for moving energy into the California market. This distinction might be enough to spare California the tough judicial scrutiny associated with facial geographic discrimination. Under a less skeptical judicial standard, California may be able to argue that its RPS discriminates only because of compelling technical reasons related to interstate power grid limitations. However, Michigan unsuccessfully cited similar technical limitations as part of its argument to Judge Posner. He dismissed this rationale, noting that one goal of FERC's pricing order was financing construction of new interstate transmission lines to bring future renewable power to Michigan. Similarly, a court could find that California's current grid limitations are not a compelling reason to discriminate against out-of-state renewable projects when allowing those projects access to the market might facilitate construction of new transmission lines. California's RPS appears to be at risk in light of Judge Posner's language. A more detailed discussion of the vulnerability of various states' RPSs is available here.
Illinois Commerce Commission v. FERC leaves many questions unanswered. Above all, it remains to be seen whether Michigan's RPS actually violates the dormant Commerce Clause. Even if unconstitutional as written, it may be possible for Michigan, California, and other states with similar RPSs to amend their laws to remove any discrimination against out-of-state renewable projects. While this may affect the source of a state's renewable energy, such an amendment might save the overall RPS from Commerce Clause challenges. For now, Michigan's RPS promoting local renewables remains unaffected, but Judge Posner's language will add to the significant uncertainty about the constitutionality of these laws.
Justin Graham, summer associate at Lewis and Roca, authored this article.©2014 All Rights Reserved. Lewis Roca Rothgerber LLP